Today (Tuesday, April 16th), after the closing bell, Yahoo! (YHOO) will announce their Q1 earnings. We at Capital Ladder Advisory Group have been covering the company for the past year and consider the upcoming results critical to understanding and properly valuing the company. After six months of promising data and action from the company with Marissa Mayer at the helm, investors will be listening extremely closely to determine if the vision Mayer has held for the company is materializing into something investors can appreciate.
Today's release will provide some much needed evidence if investors are to believe that the company is truly poised for a turnaround. In the last quarter's earnings call, Mayer pointed out that Yahoo! experienced its first year of revenue growth since 2008. A huge achievement to be certain, especially in contrast to the massive revenue losses the company was facing. However, the growth was by 2%, which is meager at best, and the company's costs of expenses rose along with it. In fact, 2012 represented another year of reduced profitability - a fact which is distorted by the massive "earnings" generated by the sale of a portion of the company's Alibaba stake.
A company facing this sort of transition must meet an inflection point somewhere along the way from losing money to regaining it, but with all of the turmoil Yahoo! has faced and mixed data the company has released, it's becoming difficult to tell whether last quarter represented such a turning point, or whether it was a pleasant anomaly on the road to irrelevancy.
To better determine where the company's prospects stand, investors should watch out for a few particular metrics. The first, and most important one, involves revenues generated by display ads. Display ads are the largest component of Yahoo!'s business, accounting for roughly 43% of revenues. While both search revenues and other revenues have increased, the display ads component actually shrunk as the number of sold ads decreased by 10% YoY. While this is certainly problematic, it's important to note that the price per ad has actually increased by 7%. To reassure investors in Yahoo!'s viability, Mayer must show us that the largest component of the business will not simply wither away. If no improved data regarding either an increase in the number of ads sold, or an increase in cost per ads adequate enough to compensate for the loss of ads presents itself, investors should expect Mayer to appropriately address the problem and present measures for correction.
One such attempt at bolstering this division was undoubtedly the updated homepage - an effort to both raise traffic on what remains one of the country's most popular web pages and generate more ad sales, as well as cement the homepage as a hub where users can easily access the rest of Yahoo!'s peripheral properties. Though it doesn't have as direct a bearing on the bottom line, we hope to hear data regarding the consequences of this page modification on traffic. It seems as though Mayer is attempting to make Yahoo!'s non-home properties the company's most attractive features, but wants users across the world to reach those properties through the homepage, creating a subsequent familiarity with the site that will translate to more search traffic and search ad revenues for the company. It's a potentially excellent plan, but investors will have no way to determine if it's working without these key traffic metrics.
This brings us back to the topic of Yahoo!'s non-core business areas, or "other business." This segment realized 10% YoY growth, thanks in part to the growing success of apps such as Flickr. However, while the company seems intent on generating traffic on these properties, primarily mobile apps, very few are contributing to the bottom line. The company has over 200 million daily users on some sort of mobile service, but other revenues only made up $273 million in revenues last quarter. That consists of not only all revenues generated from mobile apps, but all revenues generated from video ads as well. If investors are to believe that Yahoo! can become a dominant presence outside of a few niche markets, the bottom line needs to start reflecting that. While revenue sharing deals with Microsoft (MSFT), AOL and Google (GOOG) will help the company in the long run, and Mayer's plans of revitalizing search to improve both search and display ad revenues is the long term goal, it is the other revenues that will act as the main driver of growth in the medium term. As a result, it is imperative that those numbers improve, or that Mayer lays out a plan to build the company's mobile presence and capitalize on the opportunity to profit with the many top-notch apps and services the company provides.
Finally, investors learned last quarter that about half of the proceeds from the Alibaba transactions have already been released to shareholders through almost 80 million shares repurchased. We would welcome news regarding the other half earned from the sale, which is expected to be used primarily for buybacks as well. Investors should take note of the pace in which Yahoo! is repurchasing its own shares, as it will not only have an effect on EPS, but of course indicated what kind of sentiment management has on the stock's future price prospects.
General sentiment seems to be cautiously optimistic, with a Wall Street consensus of $1.1 billion revenues and 24 cents in earnings per share, representing a small gain over last quarter and Q1 of last year. Reuters is reporting analyst expectations between 22 and 32 cents in EPS. For those who put more stock into larger crowds, the Estimize community expects a more optimistic 26 cents on average, with $1.11 billion in revenues.